GST ITC After Rate Rationalisation

GST Rate Rationalisation & ITC Impact: Practical Examples Explained

The GST rate rationalisation effective from September 22, 2025 has transformed how businesses manage Input Tax Credit (ITC). Depending on whether goods or services moved to a lower slab, became exempt, or shifted to a different tax option, businesses may face surplus ITC, reversals, or refunds.

This blog explores sector-specific examples to simplify the real impact of GST 2.0 on ITC compliance.

Example 1: Goods Rate Reduced (Accumulated ITC)

Scenario: Washing machines purchased at 28% GST before Sept 22, 2025, sold later at 18% GST.

• Purchase cost: ₹10,000 → ITC = ₹2,800 (28%).
• Sale price: ₹11,000 → Output GST = ₹1,980 (18%).
• Result: ₹820 ITC surplus remains.

👉 This ITC can be set off against other taxable supplies, but no direct cash refund is allowed unless inverted duty applies.

Example 2: Outputs Become Exempt (ITC Reversal)

Scenario: Insurance company availed ITC on input services (software, rent at 18%). From Sept 22, 2025, health & life insurance premiums are exempt.

• ITC available till Sept 21 can be utilised.
• From Sept 22, ITC linked to exempt outputs must be reversed under Section 17 & Rule 42.

• Company must proportionately reverse ITC or pay back excess credit.

Example 3: Transport Services — Choosing the Right Option

Before Sept 21, 2025:

• Option 1 → 5% GST, no ITC.

• Option 2 → 12% GST, with ITC.

After Sept 22, 2025:

• Option 1 continues: 5% GST, no ITC.

• Option 2 replaced: 18% GST with ITC.

👉 Operators must weigh input costs vs. tax outflow to select the most efficient option.

Example 4: Inverted Duty Structure (Refund Claim)

Scenario: Fertiliser inputs taxed at 18%, finished fertilisers taxed at 5%.

• Leads to accumulated ITC due to inverted duty.

• Refund can be claimed under Section 54(3), unless reduction is due to slab change on the same product.

In that case, ITC can be carried forward but no refund allowed.

✅ Practical Compliance Tips

• Always check effective dates of GST notifications when claiming or reversing ITC.

• Adjust pricing & contracts if ITC gets blocked or reversed.

• Conduct stock check as on Sept 21, 2025 for accurate ITC planning.

• Communicate rate & ITC impacts with clients and vendors to avoid disputes.

📌 Conclusion

The GST rate rationalisation under GST 2.0 brings relief in many sectors but also introduces compliance challenges around ITC reversals, exemptions, and refunds. By carefully monitoring notifications, adjusting ERP systems, and training teams, businesses can manage ITC effectively and stay compliant.